Commentary and musings on the complex, fascinating and peculiar world that is securities regulation

Friday, March 09, 2012

Uniform Standards Act Did Not Apply to Brokerage Fee Claims

The 7th Circuit held that the Securities Litigation Uniform Standards Act did not apply to a putative class action against Morgan Stanley seeking the recovery of handling fees associated with securities transaction confirmations. The firm entered into agreements with its customers that set a fee for handling, postage, and insurance (HPI) for mailing trade confirmation slips after each purchase or sale of securities. The suit claimed that the fees charged bore no relationship and were grossly disproportionate to Morgan Stanley's actual transaction costs.

According to the 7th Circuit panel, the Uniform Standards Act did not apply because any alleged misrepresentation that the stated HPI fee was tied to actual costs was not material to investor decisions to buy or sell securities. Quoting an earlier 2nd Circuit decision on similar facts, the court stated that “no reasonable investor would have considered it important, in deciding whether or not to buy or sell stock, that a transaction fee of a few dollars might exceed the broker’s actual handling charges.” The confirmation slips set forth the fee amount and the plaintiffs were not charged more than the amounts reported on these slips. As quoted by the court, “if brokerage firms are slightly inflating the cost of their transaction fees, the remedy is competition among the firms in the labeling and pricing of their services, not resort to the securities fraud provisions.”

The court found, however, that Morgan Stanley, met its burden of showing that the Class Action Fairness Act's general jurisdictional requirements were met, and the plaintiff did not show that the securities exception to CAFA jurisdiction applied. The court affirmed the district court's order dismissing the complaint. The language in the agreement did not suggest that the HPI fee represented Morgan Stanley's actual costs, stated the court, and it was not reasonable to read this into the agreement. Morgan Stanley also had no implied duty under applicable New York law to charge a fee that was reasonably proportionate to actual costs where it notified customers in advance of the charges and customers were free to decide whether to continue to do business with Morgan Stanley.